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Crypto


THE FTX COLLAPSE, EXPLAINED

Wondering about the massive crypto debacle of FTX and its wunderkind former CEO
Sam Bankman-Fried? NBC News breaks down what happened and why it matters.

Sam Bankman-Fried, founder and CEO of FTX speaks at the Institute of
International Finance annual membership meeting in Washington on Oct. 13.. Ting
Shen / Bloomberg via Getty Images file
Link copied
Nov. 18, 2022, 4:39 PM UTC
By Elizabeth Napolitano and Brian Cheung

It’s a collapse that some have called crypto’s “Lehman moment.”

The bankruptcy of the crypto giant FTX and the resignation of its founder, Sam
Bankman-Fried, has left customers in limbo and investors writing off what once
looked like the next big thing in tech.




And it happened in a matter of days. But in the complex world of crypto, such a
collapse can be hard to parse. Here’s the basics of what went down:


WHAT IS FTX?

FTX is a digital currency exchange, a platform where people could buy and sell
digital assets like bitcoin, dogecoin and ether. Such platforms rose in
popularity in recent years as more people looked to invest in cryptocurrencies
without the hassle of dealing with the technical side of such transactions, such
as setting up a crypto wallet.


HOW DID IT BECOME SO BIG?

The company, founded in 2019, quickly rose to international prominence through a
series of high-profile acquisitions, aggressive marketing strategies and low
trading fees. Competitor  platforms include Kraken, Coinbase and Gemini.

Even those unfamiliar with the technology were lured to FTX with promises that
they could park their money in accounts and earn much higher yields than at
traditional banks. 



Major venture capital groups also bought in, investing almost $2 billion in the
company.

Sam Bankman-Fried, FTX’s 30-year-old founder, became the face of the company
and, to some, crypto at large. Celebrity endorsements and major sports
sponsorships made FTX hard to miss.


THE FIRST RED FLAGS

Not long after Bankman-Fried started FTX, crypto began to boom. The price of
bitcoin, which had traded at around $10,000, shot up in 2021, peaking at more
than $64,000. Venture capital money flooded into all things blockchain and
crypto, and crypto platforms moved to attract customers beyond the technologists
and blockchain evangelists that once fueled its rise.

The price of bitcoin, generally seen as an indicator of the broader crypto
market, declined dramatically from its late 2021 heights. It now trades at
around $16,000. Other crypto and token values followed suit.


FTX FOUNDER SAM BANKMAN-FRIED ARRESTED IN THE BAHAMAS

Dec. 13, 202203:05


The broader crypto industry decline had already forced many major platforms to
shut down, but FTX seemed immune, even buying up some of its struggling
competitors. 



But things began to change earlier this month, when the balance sheet of a
crypto investing firm that was also owned by Bankman-Fried, Alameda Research,
was published by CoinDesk, a crypto-focused digital media website.

It showed that Alameda held a large amount of a digital currency created by FTX
called FTT. And though that FTT held a certain market value, if the price were
to drop,  Alameda would be at risk of insolvency. 


WHAT IS FTT?

FTT is a digital token created by FTX that is similar to cryptocurrencies like
bitcoin. Many crypto platforms now create their own tokens as a way to encourage
people to use their services by offering perks associated with their tokens. As
such, tokens can act like stock in the platform.



These digital tokens use blockchain technology, in which computers contribute to
a shared ledger that can be used to track digital assets. The first blockchain
project, bitcoin, relies on many computers competing against one another to
create a distributed system that no one computer can control.

But not all blockchains, cryptocurrencies or tokens work the same way, and many
are no longer distributed as bitcoin. Tokens on a blockchain can be created by a
single entity, as was the case with FTT, which was minted by FTX and given out
as rewards to users. FTT was also less transparent than other tokens, making it
hard to track just how many tokens had been created. People could buy and sell
FTT, but trading was relatively limited. Other platforms also held the token.


A VIRTUAL BANK RUN

After Alameda’s balance sheet was leaked, Changpeng “CZ’’ Zhao, CEO of the
crypto platform Binance, a rival of FTX, announced on Nov. 6 that his company
would sell off all its FTT tokens. The price of FTT dropped sharply.

As the price dropped, many FTX customers moved to withdraw their assets from the
platform. Though the extent of the connections between Alameda and FTX were not
yet public, a series of recent crypto platform collapses had already put the
crypto community on edge. 



Those withdrawals would end up resembling a classic bank run, in which people
worried about a bank’s solvency rush to get their money out before it runs out
of cash. Billions of dollars poured out of the platform.

On Nov. 8, FTX stopped allowing customers to take money out of the platform.


AN UNBALANCED BALANCE SHEET

What was not yet public was the extent of the connections between Alameda and
FTX, or just how bad things had gotten for Bankman-Fried’s companies.

Those connections began to become clearer in the days following FTX’s move to
stop withdrawals, as would its financial challenges. Media organizations
including Bloomberg, the Financial Times, The Wall Street Journal and others
cited anonymous sources saying that  FTX needed $8 billion to cover the gap
between what it owed and what it could pay out. NBC News has not verified those
reports, and Bankman-Fried said in an interview Monday with a Vox journalist
over Twitter DM that he needed to raise $8 billion in the next two weeks to make
things right with account holders.

Sam Bankman-Fried on Capitol Hill on Sept. 15.Graeme Sloan / Sipa USA via AP

The Wall Street Journal and CNBC, also citing anonymous sources, reported that
Alameda had used FTX funds for trading.


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And in the Vox interview, Bankman-Fried appeared to confirm reports that funds
had moved between FTX and Alameda, adding that he “thought Alameda had enough
collateral” to cover the moves.



Soon after that, blockchain analysts tracked the flow of $400 million of assets
out of FTX accounts, though it was unclear why those funds had been moved.

In a series of text messages to Reuters, Bankman-Fried denied funds had been
furtively funneled from one company to the other. He blamed the transfers on an
internal mislabeling issue.  

However, it is difficult to ascertain how and why the company’s funds were
handled the way they were, according to a court filing from FTX’s current CEO,
John Ray, who helped navigate Enron through its corporate bankruptcy process in
the early 2000s. 



That’s because FTX and its sister companies allegedly didn’t follow standard
financial reporting procedures.

Normally, a business produces balance sheets several times a year that provide
reliable information on the company’s assets (what the business owns) and its
liabilities (what it owes), among other things. But the balance sheets of
Bankman-Fried’s firms were never audited, according to the company’s bankruptcy
court filings, meaning there is no reliable account or paper trail of what money
the company had and where it went. 

Ray called FTX’s poor management and financial opacity “unprecedented.”

“Never in my career have I seen such a complete failure of corporate controls
and such a complete absence of trustworthy financial information as occurred
here.”



Ray wrote that the company has thus far secured $740 million of cryptocurrency
held by the various companies that made up FTX and Alameda, a number that is
only a “fraction” of what they hope to recover.


A LIFELINE YANKED AWAY

Before the full extent of the crisis became public, and desperate to keep his
companies afloat, Bankman-Fried grasped for a lifeline as signs of a broader
crypto crash loomed. 

Zhao, one of FTX’s first investors, stepped in to make a play for his former
rival. On Nov. 8, he announced that Binance would purchase FTX for an
undisclosed amount in what would essentially constitute a bailout for the
beleaguered firm. But Binance quickly backed out, with Zhao citing reports that
FTX had mismanaged user funds and information gleaned during the standard due
diligence process that accompanies such deals.

Binance Co-Founder and CEO Changpeng Zhao speaks at the Web Summit in Lisbon on
Nov. 1..Patricia De Melo Moreira / AFP - Getty Images

Bankman-Fried has acknowledged the company’s problems on Twitter, where he
remains active. Last week he posted a lengthy thread that started “1) I’m sorry.
That’s the biggest thing.”



“I f----- up, and should have done better,” he added.

Last Friday, Nov. 11, Bankman-Fried stepped down as CEO of FTX, and the
companies he oversaw filed for Chapter 11 bankruptcy. The Wall Street Journal
and the Associated Press, citing anonymous sources, have both reported that FTX
now faces investigations by the Securities and Exchange Commission and the
Department of Justice. NBC News has not verified those reports.

Elizabeth Napolitano

Brian Cheung

Brian Cheung is a business and data reporter for NBC News.

Jason Abbruzzese contributed.


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